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China euphoria fades

Yesterday’s euphoric reaction to China’s easing measures has proved to be short lived as equities around the region experience some downside today.

Japan Stocks
Source: Bloomberg

Japan is an exception after returning to trade following yesterday’s holiday in observance of Labour Thanksgiving Day. The Nikkei has played a bit of catch up and is modestly firmer with investors focusing on BoJ monetary policy meeting minutes and some comments by BoJ Governor Kuroda. USD/JPY reacted positively to the BoJ minutes which showed Kuroda is considering expanding the scope of purchases, in order to reach the 2% inflation target. However, there are also concerns about diminishing benefits from expanding quantitative easing. Additionally, it seems the BoJ is concerned about being perceived as financing the government deficit. While the minutes continued to sound a dovish tone, strength in USD/JPY was short lived and we have since seen the pair pull back to the ¥118.00 region. We have already had several key Japanese officials speak today including Amari, Aso and Kuroda; all suggesting the economy is headed in the right direction despite recent hiccups. This is hardly surprising given we are now en route to elections. I expect to see a lot more of this in coming weeks and in turn volatility in the yen and Japanese equities is likely to ramp up.

Central banks passing the baton

The risk-on trade seen yesterday is hardly evident today with investors unconvinced the easing measures taken by China will be adequate in the near term. Some analysts have gone as far as saying China is no longer ‘credit efficient’ primarily due to asset overvaluation and high debt levels. Investors are also still trying to come to grips with China reverting to more traditional policy measures as opposed to all out stimulus. This could easily be a long road to recovery for China but it seems officials are more concerned about preventing a hard landing next year, as opposed to instant gratification.  We continue to see a situation where central banks are passing the baton as far as easing is concerned. Without this, it’s a wonder where support for global markets would be coming from. With the Fed having driven markets over the past few years, it seems it’s now up to the BoJ, PBoC and ECB to keep the momentum going.

Medibank loses ground

The ASX 200 has given up most of yesterday’s gains primarily due to weakness in the materials space. Iron ore names went from heroes to villains as most of them gave back a chunk of yesterday’s gains. While sentiment was positive yesterday, the move was perhaps exaggerated by short covering given the iron ore stocks were some of the most shorted stocks on the market for a while. Iron ore futures have given up ground in Asia and evidence of weakness was already prevalent in yesterday’s session. The energy space is also on the backfoot as oil and gas both struggle. Oil has continued to decline despite speculation OPEC might be looking to cut production. However, analysts continue to feel it will find an anchor around the $80/bbl mark. Medibank’s debut has predictably been the highlight of today with the stock commencing trade well above the $2 mark. This sees retail investors doing quite well on the stock but the premium on the stock (PE of around 21 times earnings) is probably the reason it is lower for the day.

Euro strength likely temporary

Looking ahead to the European open, we are calling the major bourses mildly firmer. EUR/USD managed to hold on to support at November lows in the $1.2358 region, which saw it squeeze back above $1.2400. This was thanks to a surprise rise in the German Ifo business climate reading and comments by ECB member Nowotny. While the single currency popped a bit yesterday, also helped by the risk-on tone, I still feel the fundamentals haven’t really changed and this is just another opportunity to sell. On the calendar today we have German final GDP and Italian retail sales due out. In the US, we have the second estimate of Q3 GDP growth, consumer confidence and the Case-Shiller house price index. The latest economic forecasts will also be released by the OECD.

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